The overall goal of this project is to determine culture conditions that promote differentiation of embryonic stem (ES) cells to pancreatic beta-cells. Various protocols reported to date are largely inefficient and not reproducible. Recent progress in establishing culture conditions to direct differentiation of ES cells to definitive endoderm as a first critical step has advanced the field. In this application, we propose to conduct stepwise optimization of culture conditions to direct differentiation of endoderm to pancreatic beta-cells to mimic the pancreatic development in vivo. To this end, we will utilize a unique mouse ES cell line in which pancreatic beta-cells are endogenously marked with green fluorescent protein (GFP) under the control of mouse insulin I promoter (MIP), in combination with sequential expression of stage-specific reporter genes. This novel system will enable us to study the process of beta-cell formation in real-time thereby allowing us to readily quantify beta-cells at each stage without destroying the culture, which will accelerate the identification of culture conditions that promote beta-cell differentiation. Furthermore, as our in vivo assessment of differentiation of MIP-GFP ES cells by renal transplantation in mice demonstrates, endocrine cell differentiation occurs forming the epithelial tubular structure that recapitulates fetal endocrine cell neogenesis, suggesting that the differentiation takes place in three-dimensions and is controlled by the environmental cues. Here we propose to define the environmental cues and signaling pathway components during fetal pancreatic development in Specific Aim 1. In parallel in Specific Aim 2, we will test the hypothesis that ES cell differentiation to pancreatic beta-cells mimics the fetal beta-cell differentiation. Followed by Specific Aim 3, we will aim at establishing the minimal artificial in vitro environment to direct differentiation of ES cells/definitive endoderm to beta-cells. This application has three specific aims.